Do I have to sell my shares to my cofounder?
Our company ran low on funds about 4 months ago. We decided it would be best If I took on an advisory role and went to work elsewhere to cover my personal expenses. I have vested shares in a large portion of the company. We had raised a modest seed round from a few investors.
Recently my co-founder who has been absent reached out to me and stated he needed to buy out my shares to help secure further funding for the company. I'm unsure if I'm obligated to sell to him. If so, what can I expect in terms of the legal paperwork that is involved in selling shares?
Co-Founder Equity Legal Shares
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Why do you think you're obligated? – Littleadv 12 years ago
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My main concern is that I haven't exercised my options. I'm partially vested and haven't officially terminated my involvement as I've been an advisor. – User23581 12 years ago
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What do you mean by "what can I expect from the sale?" If you are referring to monetary compensation, that is an unanswerable question. – Zuly Gonzalez 12 years ago
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@ZulyGonzalez I mean paperwork, legal action, monetary compensation. Why is monetary an unanswerable question? – User23581 12 years ago
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Because we have no idea how many shares you have or what the value of those shares are. – Zuly Gonzalez 12 years ago
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@ZulyGonzalez so its not unanswerable. Should I be expecting fair market value then? and how can I calculate that? – User23581 12 years ago
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I edited your question to make it more specific based on your comment. Asking "what can I expect?" is too vague, and will lead to opinions and discussions. Broad, open-ended questions are not allowed on this site. See our [FAQ]. – Zuly Gonzalez 12 years ago
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Valuation is a complicated topic. But in the end, your shares are only worth what someone is willing to pay for them. If you'd like you can ask a separate question re valuation, but it **must** be specific, or we will have to close it. Simply asking "what are my shares worth" is not something we can answer. – Zuly Gonzalez 12 years ago
3 Answers
What you can expect is that if your large portion of the company shares remain, it is unlikely that you will secure funding. The term "absent cofounder" is also concerning - if you both are elsewhere, who runs the ship?
As an advisor, you should have more information about what the investment deal is and the stipulations surrounding them. Sit down with the appropriate parties and negotiate a way to get cash into the company. A large portion of zero is still zero - dilution to resurrect the company is usually better than the alternative (closing shop).
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By 'absent' I mean my cofounder has majority shares but stated that they wanted to only run the company on nights and weekends and treats it as more of a hobby than a business. This heavily played in my move to advisor as I am more of a fan of making money in a business and didn't agree with raising more investment on an air business. However he held more shares and I was essentially terminated to an advisor level with all my shares. – User23581 12 years ago
My advice would be to take the money and run. You are being offered cash for shares in a pre-funded company that may never make it at all if you fight them on the sale. Many investors don't want absentee owners and many will not invest if they think there is going to be a problem.
The price of the share should be equal to whatever the value outside investors put on them. For instance. If you have 10% of the pre-money shares and your partner sells 50% of the company for $1,000,000 you're left with 5% of a $2,000,000 company. Your shares, therefore, are worth around $100,000.
Keep in mind, however, that the investor may not want to pay you out the cash so you may have to take a lower rate from your partner.
Don't be afraid to walk away from this business. Most new companies fail and getting anything is great. In only a very, very small percent of the time is this bad advice.
I think the problem the company is facing in terms of raising capital isn't a matter of outstanding shares. The problem is that a co-founder left! And if I'm an investor and I find out that a co-founder wasn't willing to invest his time into the business then why should I invest my money?
